Digitalisation & Algorithms Notes

Digitalisation, Algorithms and Competition

The internet is seen as the closest thing you can imagine to perfect competition – prices are the lowest, quality is the best, there are unlimited buyers and sellers.

We are better off that we were 15 years ago – back then, if you went to a travel agent looking to purchase flights, they could tell you whatever they wanted because you didn’t know better; nowadays, we can search online for and find the cheapest available flights.

When you search today, we have minimal search costs because technology can second-guess your desires.

However, there is a darker side to the algorithm-driven economy:

• Initially, the wave of digitalisation that benefitted us all, but then business subject to lots of competition and so adopted strategies to be able to compete more effectively.

• The invisible hand of the market has been displaced by a digitalised hand on the internet – what you see online often does not represent the market.

• We work on the assumption that what we see is the market.

• Online providers can manipulate the digitalised hand to serve their requirements –

• X’s awareness of other providers of goods depends on what online providers choose to show you. Not everything happens organically.

1 – Behavioural Discrimination

Generally, discrimination can be a good thing – cheaper off-peak bus fares; cheaper cinema costs due to being a student. Without discrimination if all P were the same, it would be very inefficient – makes economic sense.

Online, X can gather data about the user and can engage in almost perfect discrimination.

• Moves from third degree group discrimination to first degree price discrimination. It has massive implications on transferral of wealth on society.

• What the online sphere has added is the ability to engage in behavioural decoys to influence the user to make certain purchasing decisions.

• Everything you see/do is designed with you in mind, such as the price and the order in which you see things.

This links to dynamic pricing. Companies that offer DP also offer personalised pricing (PP):

• At a simple level algorithms will look at the path you used – if you are a loyal customer who comes directly to the website, the algorithm will offer you the standard P.

• If you come to the website through a search engine, the algorithm will offer you a reduced price because they assume that you have access to other prices via...

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